Carla's Citrus Packs and Ships High-Quality Oranges,grapefruit,and Other Fruit to Retailers

question 104

Essay

Carla's Citrus packs and ships high-quality oranges,grapefruit,and other fruit to retailers in the U.S.Carla has been experiencing an increase in demand for its products and is considering the purchase of a new packaging machine to replace the machine currently in use.The new machine will cost $202,500,and installation will require an additional $4,050.The machine has a useful life of 10 years and is expected to have a salvage value of $5,400 at the end of its useful life.The variable cost to operate the new machine is $13.50 per carton compared to the current machine's variable cost of $13.65 per carton.Carla expects to pack 250,000 cartons each year.If the new machine is purchased,Carla will avoid a required $13,500 overhaul of the current machine in three years.The current machine has a market value of $16,200.
Required
a.Calculate the net present value of the new packaging machine.Assume that Carla uses a 10% discount rate.
b.Do you recommend that Carla purchase the new machine? Why or why not?
c.Assume that Carla has adopted a new 15% discount rate.Do you recommend that Carla purchase the new machine? Why or why not?

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Definitions:

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